The Illusion of Wall Street Reform

As the pundits and politicians cry for overhauling reform, I sit and wonder how many Americans truly believe that Wall Street will change its ways. If history is any guide, the story of Mr. Market, of fear and greed, and of booms and busts is here to stay. Here is an interesting article on the illusion of Wall Street reform by Jon Hanson professor at Harvard Law. (Click here to skip intro and read full article)

Article Introduction (From The Situationist)

Today Barach Obama calls for regulator reform, while John McCain (long-term proponent of deregulation) has called for comprehensive regulations that will apply the rules and enforce them to the full. It was that sort of regulatory impluse that gave use the Public Company Accounting Oversight Board and the Sarbanes Oxley Act of 2002, which Bush called the most far reaching overhall of American business practices since the great depression. Sure soudned promising. The latest bailouts and scandals will no doubt lead to similar reforms, some of which are already in the works. An important question, then, is what those reforms should be?

Article Excerpts (From The Situationist)

“Unfortunately, there is a good chance that those reforms will not have much long-term effect. The real risk is that we get the illusion of reform, not meaningful, substantive and lasting reform. Calls for change come loudly when a crisis rears its head. Inevitably, however, the fervor fades, as workaday duties, dentist appointments, American Idol and the pennant races distract the public and, in turn, policymakers.”

“Consequently, the post-Enron reforms never lived up to the post-Enron rhetoric, and the regulatory teeth that Sarbanes-Oxley initially flashed have been blunted by pro-business revisions. Some provisions never made it into SOX, such as a requirement that lawyers report to the Securities and Exchange Commission if a company’s board failed to respond to warnings about misconduct.”

“If history is any guide, the same sort of dynamic will unfold this time around. The reforms that we see will be largely procedural, not substantive — check this, sign that, certify here, jump a hoop there — and they will not fundamentally change the situation that produced this crisis. The reform will look sweeping, because it will be broad-based and ballyhooed as “tough.” Soon enough, the business elite will complain that, indeed, it is too tough.he mantra of “markets good, regulation bad” and the primacy of shareholders will return.”